aiming higher how manufacturers are adding value to...

Aiming higherHow manufacturers are adding value to their businessA report from the Economist Intelligence Unit

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Aiming higherHow manufacturers are adding value to their business

© The Economist Intelligence Unit Limited 20101

Preface

Aiming higher: How manufacturers are adding value to their business is an Economist Intelligence Unit briefing paper, sponsored by Siemens PLM Software and Microsoft. The Economist

Intelligence Unit bears sole responsibility for the content of this report. The Economist Intelligence Unit’s editorial team executed the survey, conducted the interviews and wrote the report. The findings and views expressed in this paper do not necessarily reflect the views of the sponsors.

The research drew on two main initiatives. We conducted a global online survey in February-March 2010. In all, 355 executives took part. To supplement the survey results, we also conducted in-depth interviews with senior executives and independent experts knowledgeable in the field of manufacturing. The following individuals were interviewed for this report:

l Adam Buckley, head of programmes, The Manufacturing Institute (UK)

l Carlos Cordón, professor of manufacturing management, IMD business school (Switzerland)

l Matthias Dinse, managing director, AUMA (Germany)

l Pat Hassey, chairman, president and chief executive, Allegheny Technologies (USA)

l Frank Krause, director of competence development, Staufen (Germany)

l Ann Marucheck, chair and professor of operations, technology and innovation management, Kenan-Flagler Business School, University of North Carolina (USA)

l Per Hornung Pedersen, chief executive, REpower (Germany)

l Mike Zinser, partner, Boston Consulting Group (USA)

The author of the report is Sarah Murray and the editor is Iain Scott. Our sincere thanks go to the executives who participated in the survey and interviews for sharing their time and insight.



As manufacturers nurse their wounds after the worst recession since the 1930s, many are taking a long, hard look at their business models and making some changes. For many companies, this

has meant increasing the proportion of revenue generated by non-traditional activities such as service provision. For others, the soul searching has prompted a move from high-volume goods to high-value products.

Although some of this was going on before the global financial crisis hit, the downturn has forced manufacturers to step up their flight to value. With orders shrinking and the crisis threatening the security of supply chains, many companies had to rein in their ambitions and focus more narrowly. At the same time, cost-conscious industrial customers started to demand better value for money, such as including post-purchase maintenance servicing as part of the deal.

Whether prompted by a fight for survival or a desire to get ahead of the competition, high-value or value-added manufacturing is proving an increasingly popular business model for manufacturers. This means different things to different companies—from speed of delivery, high-end products or unique production processes to highly customised packages and environmentally sustainable product lines.

What is clear, however, is that organisations once primarily engaged in making products are now also researchers, designers, services providers—and even retailers. As they look to increase revenue streams and emerge from recession in a stronger position, manufacturers are redefining themselves as they evolve from being makers of boxed products to sophisticated providers of “solutions”.

This report looks at the strategies companies are embracing as they battle to win market share and how, in the process, they are starting to question the very notion of what it means to be a manufacturer. The key findings from this research are highlighted below.

Manufacturers appear to be optimistic about business prospects. Some 61% of respondents to our survey describe their business outlook as good, and that they expect things to continue to improve. Over one-half (54%) are optimistic that the same applies to their sector. This optimism bears out at a macroeconomic level: in the first quarter of this year, world trade rose sharply as business inventories were restocked and confidence picked up again. This is in sharp contrast to a year ago, when barely one-third of manufacturers anticipated an upturn in business within the next year, amidst a general collapse in trade globally.

Executive summary



The recession has intensified efforts to target the high ground. In an ongoing flight from volume to value, a growing number of manufacturers are changing their business models to target higher-value products, deliver more customised offerings or bundle in additional services. Such a shift usually requires a greater focus on innovation and more highly skilled workers—and both of these trends are in evidence. Despite the tough conditions, a high proportion of manufacturers (40%) invested in research and development (R&D) for product and process innovation over the last 12 months, while one in five (19%) took on board additional highly skilled engineers and other workers.

Manufacturers are rethinking their supply chains. Alongside this shift towards value-added manufacturing, firms are also rethinking their supply chains. Toyota’s fall from grace over quality concerns has raised question marks about the once-heralded “lean” manufacturing approach. Others are considering suppliers nearer to home, especially as oil prices and related transport costs rise, while many are cutting back on their supply chains. Almost one-half (48%) of executives say they are looking to shorten or simplify their supply chains. Many are simply looking to bring previously outsourced process back in-house. Regardless of the approach taken, suppliers are being squeezed on costs: more than one-half (53%) of respondents say that they will be looking to form partnerships with cheaper suppliers.

Cost concerns continue to loom large. Steel, iron ore and copper are just some of the raw commodities, crucial to many manufacturers, that have been rising in cost as the global economy rebounds. A year ago, as credit dried up and banks sought to avoid risk, manufacturers worried most about a lack of access to capital. But as the economy has improved, raw materials costs are back at the top of the agenda, along with transport costs. More than one-half (55%) of manufacturers polled cite rising materials costs as a primary risk, while one in five (22%) cite transport costs as well. Pressure to keep prices low (34%), as well as increased competition and currency fluctuations (both 32%), are other key risks.

Firms are reliant on their cash flow and bank loans for working capital. The most common mechanism for funding operations is by far existing cash flow. However, 38% rely on bank loans, which may be a risky strategy in view of the fact that bank financing is likely to be restricted, at least in the UK and Europe, according to Economist Intelligence Unit expectations. Only a few (4%) rely on government subsidies, but more than one-half (57%) of respondents say that government support for firms in the market in which they operate has been either crucial or somewhat important in the last year.

The environment is rising up the agenda. Also supporting the notion that there is a flight to value is the finding that more than two-thirds of manufacturers (67%) have already embarked on developing “green” products or services, or plan to do so. This proportion rises to about nine in ten among companies in the electrical equipment and appliances sector, as well as the textiles sector—driven in part by rising legislative pressure to recycle products and reduce the use of toxic chemicals. This shift towards greener products and services will also add to the need for greater innovation within firms—as well as collaborations with new partners. In addition, the environmental agenda, whether driven by sustainability initiatives or simple cost concerns, is also improving internal processes: 43% of companies plan to cut their energy consumption in the years ahead.



S ince the beginning of the global economic downturn, manufacturers have been through a harrowing time. From carmakers and yacht builders to technology component producers,

many firms have fallen over the edge of the precipice or have had their businesses snapped up by competitors, the victims of contracting order books and collapsing supply chains.

Even for survivors, recession has had an impact on operations. Companies have looked for ways to trim their operational costs through everything from staff lay-offs and cut-back product ranges to partnerships with cheaper suppliers and energy-efficiency measures. “Last year at this time, there was so much uncertainty that nobody dared to do anything,” confirms Carlos Cordón, professor of manufacturing management at the IMD business school in Switzerland.

One multinational company in the electronics industry even did what Professor Cordón calls “the unthinkable” and abandoned the idea of an annual budget. But today, the pessimism is not quite so pervasive. “Companies are saying at least they know what is going to happen with a degree of certainty,” he says. “They are more optimistic because they know what’s ahead.”

That optimism is reflected in this survey of manufacturing executives. More than one-half of respondents now see their business outlook as good and likely to improve; even among those less certain about the future, the sense of economic freefall no longer prevails.

The trend is supported by recent figures from the US. In April, the Institute for Supply Management reported that factory output had grown for the ninth month in a row, and the manufacturing sector had grown at its fastest pace since June 2004.1 Manufacturing output has risen in the UK too: in April, the CIPS/Markit Purchasing Managers’ Index climbed to its highest level since September 1994. Meanwhile, the UK’s trade deficit narrowed to £2.1bn in February, compared with a deficit of £3.9bn in January.

Some countries are less optimistic than others. According to a survey of manufacturers conducted in late 2009 by Boston Consulting Group (BCG), an advisor on business strategy,2 only 40% of Japanese executives predict growth for their companies in the near term, compared with 62% worldwide. Fewer than one-half of Japanese executives predict that Japan’s GDP will grow; the same number expect that its economy will shrink.

Broadly speaking, however, optimism is gaining momentum. As it does, manufacturers are seeking

Introduction

1 Institute for Supply Management, Manufacturing ISM Report On Business, April 2010.

2 Boston Consulting Group Global Survey, Business Executives Expect Difficult Times to Continue in 2010—But Are Failing to Plan Tough, Defensive Actions, December 2009.

Key points

n Manufacturersareemergingfromthedownturnleanerandhungrierfornewmarketsandcloserrelationshipswithcustomers.

n Manyareseekingtoaddvaluetotheirbusinesspropositionsbyofferingmoreafter-marketservicesortailoredproducts.

n Toachievethis,theywillneedtoattractandretainhighly-skilledworkers.



ways to boost revenue. They have sought new markets overseas, for example, increasingly regarding emerging markets as customers rather than simply as sources of cheap materials or labour. At the same time, companies have brought back in-house many processes they had previously outsourced to low-cost markets. Rather than companies seeing China as primarily the world’s factory, a more

Dealing with the downturn

Our survey reveals that over the past year manufacturers have embarked on a raft of initiatives in a bid to boost their business prospects. Yet while many of the measures they have taken are commonly seen during hard times—such as management and structural tweaks, fixing operational inefficiencies and laying off staff—there is also evidence that companies are coming up with new, more innovative strategies for boosting business.

Such innovation is necessary. Our survey shows that although manufacturers are generally optimistic about their own business prospects, they are less confident about their ability to access previous levels of capital. Their customers’ finance prospects are also a source of concern. “Things have improved, but for our customers it’s still troublesome to get project financing,” says Per Hornung Pedersen, chief executive of REpower, the German wind turbine manufacturer.

Many respondents worry that the costs of raw materials, transport and energy will rise, and that increased competition and shrinking markets will pose risks to their business. To cushion themselves against these risks, manufacturers have sought

cheaper suppliers, or simplified their supply chains, or tried to reduce their energy consumption.

But recession has provided opportunities too. With plenty of downtime on their hands and reluctance on the part of many companies to get rid of their most valuable asset—skilled employees—manufacturers have been putting their houses in order and building competitive advantage. More than one-third of respondents to our survey retooled their product development processes to get goods to market more quickly, while 30% diversified into new product markets. Some are investing in skilled workers—Dyson, the British company best known for its vacuum cleaners, announced in April that it planned to double the size of its R&D team by hiring 350 new engineers and scientists.

Manufacturers in some sectors, such as technology, hardly broke their stride in the downturn. Apple launched its iPad technology in April, in a move reminiscent of its decision to launch the iPod music player during the last global downturn. Furthermore, although many manufacturers have developed service divisions as a result of the downturn, some technology service companies have branched into manufacturing—witness the move by Google and Microsoft to enter the smartphone space.

What are the primary risks to your business over the next 12 months? Select up to three. (% respondents)

11Lack of access to capital

8Political instability

21Skills shortages

55Rising cost of materials

22Rising cost of transport

32Currency fluctuations

10Protectionist measures

34Downward pressure on our own prices

33Increased competition

23Shrinking markets



balanced picture is emerging. Where outsourcing continues, companies in the US and Europe are looking closer to home—to Mexico, for example, or eastern Europe.

Meanwhile, manufacturers’ business models are changing shape, as they shift to production of higher-value products, or look to provide more services as part of their core offerings. Customisation has also increased as companies seek closer relationships with customers.

“If someone needs something that’s different from what’s on the market, we develop alloys for specific end users,” says Pat Hassey, chairman, president and chief executive of Allegheny Technologies Incorporated (ATI), a US-based speciality metals company that has made customisation a central prong of its competitive strategy. “We’ve learned to package in the way customers want, and since we have flexible assets we can ship in multiples and quantities that might be very different from a large mill.”

To move into non-traditional activities and provide more tailored products to their customers, manufacturers need to invest in R&D. In our survey, 40% of respondents have done just that, in order to improve their product and process innovation capability. Respondents have also been hiring highly skilled workers and are seeking new partners for product or process development. More than one-half (57%) aim to accelerate innovation in both products and services, and 23% in products alone.

The implications are clear. Many manufacturers are realising that in order to thrive—if not simply to survive—they need to enhance their innovative prowess and equip themselves with skilled employees. In the process, they are moving manufacturing away from its industrial roots, embracing added value, customisation and service provision.

The road to high-value manufacturing has seen some auspicious pioneers. It was the road taken by Rolls-Royce, the British engine manufacturer, more than two decades ago. By 2004, more than one-half of the company’s revenue came from after-market services.3 But those services contribute to only part of what Sir John Rose, Rolls-Royce’s chief executive, sees as the company’s “high-value activity”. In a speech to the Royal Society for the Encouragement of Arts, Manufactures and Commerce in 2009, Sir John set out his definition of high-value manufacturing: “It is knowledge-intensive, rich in intellectual property, requires high-level systems integration skills, demands and supports a highly skilled workforce and an extensive supply chain, has a close involvement with universities, high barriers to entry and creates significant converted value.”

Not every manufacturer will embrace value-added strategies to the same extent as Rolls-Royce. However, in the process of retooling their business models at the tail-end of some tough times, many are putting a greater emphasis on customisation, service provision and high-value products.

3 University of Cambridge, Defining High Value Manufacturing, January 2006.



Many manufacturers see that their future profitability lies in offering their customers higher-value products, accompanied by a higher degree of customisation and an increasingly sophisticated

range of services. In fact, many manufacturers no longer describe themselves as such, preferring the term “solutions provider”.

When asked what critical changes their organisations plan to make to their business model in the year ahead, many of the manufacturing executives we surveyed point to high-value products. They say their companies would supply products that are “more advanced and technical”, “more valuable”, “value-added” or “niche”, as well as striving for “upward adjustment in the area of product quality”, “providing superior tailored value” and focusing on “advanced technology product development” and on “small volume custom” products.

These are fine ideals, but to achieve them manufacturers need to embark on research and development. Our survey clearly indicates that manufacturers expect to step up their R&D investments. In the year to March 2010, one-fifth of respondents spent 4-6% of their revenue on R&D; in the next 12 months, one-quarter will spend that proportion. Only a relatively small number—13%—aim to cut their R&D budgets.

Meanwhile, manufacturers are moving from working purely in production. Some are engaging in areas such as product design, while others are offering support services and customisation. In our survey, one-third of respondents say they are engaged in top-end manufacturing, while over one-quarter are engaged in design services and 17% offer additional consulting services. In the electrical equipment and appliances sector, when it comes to top-end manufacturing and design services, these figures rise to 54% and 40% respectively.

“Manufacturers are increasingly becoming service providers,” says Ann Marucheck, chair and professor of operations, technology and innovation management at University of North Carolina’s Kenan-Flagler Business School. She cites the example of IBM, which in 2004 sold its PC manufacturing division to Chinese company Lenovo. “Today IBM gets the majority of revenue from its service arm,” says Professor Marucheck. “But it was always very astute in offering field service, installation, training and all sorts of what they would call ‘solutions’ around their products. They finally concluded they were better service providers than they were manufacturers.”

High-value visions

Key points

n Forsomemanufacturers,movingintovalue-addedareashasbeenanecessityofincreasedcompetitionordwindlingmarkets.

n Othershaverecognisedthatmanagingthedatageneratedbytheirproductsismorelucrativethanproductsalesalone.

n Someregions,suchastheUK,areworriedaboutatalentshortageincomingyears.



In the same year that IBM sold its PC division, Rolls-Royce reported that more than one-half of its revenue came from services. In his 2009 speech to the Royal Society, Sir John Rose used as an example his company’s engine health monitoring unit, which collects detailed data about the performance of an engine in flight and transmits that data to operations centres, allowing the company to respond to customers in real time. “This is a good example of how high-value manufacturing supports the most advanced services, which only the manufacturer of the product can supply,” Sir John told the audience.

As manufacturers produce increasingly technologically sophisticated products, this kind of data management could provide a new revenue stream. Rather than relinquishing responsibility for their products at the end of their warranties, manufacturers retain responsibility—and, ideally, earn customers’ respect and repeat business—through service contracts for running the data networks needed to manage the information generated by their products.

REpower conducts 24-hour monitoring of its turbines for clients around the world. “Often the services are done by someone in Germany doing a reset on a computer on a turbine standing in southern Italy or Inner Mongolia,” says Mr Pedersen. “The data are interesting for the client because they can see how the turbines are performing, so that’s part of the package.”

Sophisticated medical products also generate data that can be analysed and interpreted by the same companies that produce them. One such company is Blue Chip, a Cambridge-based biotech firm and producer of DNA diagnostics technology. The company not only produces microarrays, probes, labelling systems and software, but also accompanying services such as metabolic profiling. Germany-based Fresenius, the world’s largest manufacturer of kidney dialysis machines, long ago realised that the real money in the business was in running dialysis clinics. Fresenius now operates one-third of America’s dialysis clinics, allowing it to dominate both markets.

Following the financeThe move towards solutions rather than products also reflects the concerns of lenders that emerged during the downturn, as they sought to reduce their exposure to risk. “We see an increasing tendency to go more for solutions, and that fits into project financing,” confirms Mr Pedersen.

Because wind power projects require many suppliers, from logistics providers to construction companies, REpower will often include the services of those providers in a more comprehensive package, according to Mr Pedersen. “The banks want less complexity, so that leads to deals where a limited number of parties are providing the solutions, rather than having 20 or 30 different providers.”

In some cases, manufacturers’ push into high-value products is a result of the decline of their sector overall. In Pittsburgh, for example, as the steel industry waned, new manufacturing industries emerged in the life sciences sector, along with businesses built on the American city’s industrial heritage such as speciality metals producers. Some manufacturers in North Carolina’s once-thriving textile industry, finding themselves unable to compete on price with rivals in Asia, have moved into specialised products used by the healthcare industry. “Some of the remaining manufacturers are dropping woven textiles and going on […] to become more customised contract textile makers,” says Professor Marucheck.

Working more closely with customers on their product specifications has become a critical element of ATI’s business strategy. Mr Hassey points out that his customers do not come to the company to buy


© The Economist Intelligence Unit Limited 2010�

a product but to fulfil a technical need. “If a customer wants a specific shape or size or some fabrication done prior to receiving the material, we can accommodate those requests,” he says. “So we are doing more fabrication and customising of the alloys.”

Professor Marucheck sees this approach becoming a central strategy for many manufacturers. “Customisation is part of this ‘servitisation’ of manufacturing,” she says.

Are talent issues back on the agenda?

In their new roles as “solutions providers”, identifying and maintaining a steady supply of talented workers will become increasingly important for manufacturers. Many were forced to lay off hundreds of workers during the worst of the downturn, but retaining and hiring skilled workers remains a high priority.

The issue becomes more important as recovery starts to materialise. In our survey, more than one-fifth of respondents cite skills shortages as a risk to their business over the next 12 months. Almost the same number have hired skilled workers over the past year, even though the downturn forced many companies to reduce their headcount.

It is not hard to see why. An overwhelming majority (91%) of respondents say R&D investments have been spent in-house over the past year, and almost the same number do not expect this to change in the next 12 months.

Meanwhile, many in the sector are concerned that the talent pool is shrinking. Such fears seem particularly prevalent in the UK, where prominent industry figures such as Sir James Dyson—inventor of the eponymous vacuum cleaner—have repeatedly warned of a coming shortage of engineers. One theory behind fears of a skills shortage may be that older workers are retiring faster than they can be replaced. “Keeping hold of those skills has been more and more important,” says Adam Buckley, head of programmes at the Manufacturing Institute, a UK-based industry group.

In the institute’s regular survey of manufacturers’

priorities, the issue of talent and skills has moved sharply up the list of concerns, from seventh in the fourth quarter of 2009 to second after production costs in the first quarter of 2010. According to Engineering UK, an independent industry group, almost 600,000 new workers must be added to the manufacturing workforce. It believes that demographic shifts will lead to an 8% drop in the number of 15-24-year-olds—the target group for new engineering graduates—over the next decade.4

Aware that demographic trends are not in their favour, companies have been less ready to lay off workers than in previous recessions. “While historically, in a recession, manufacturers have got rid of people, this time they have looked at other ways to keep hold of those scarce skills resources,” says Mr Buckley.

Similar issues apply in the US, according to the Boston Consulting Group (BCG). However, striking a balance between being overstaffed and retaining talented employees can be tricky for companies, acknowledges Mike Zinser, a Chicago-based partner leading the manufacturing sector practice at BCG. Our survey backs up that assumption. Some respondents say they will have to outsource more of their R&D in the year ahead, perhaps indicating that they are worried about attracting enough skilled engineers in-house.

“Talent management is a critical area that a lot of organisations are starting to focus on,” says Mr Zinser. “But with the downturn you can only cut so far without hitting the bone, so keeping the key folks busy while not shooting yourself in the foot economically is critical—that’s a hard balance to strike.”

4 Engineering UK, Engineering the future - a vision for the future of UK engineering, 2009.



I f companies are moving towards newer high-value manufacturing models, they are also questioning modes of operation that have long gone unchallenged. For a start, one of

the manufacturing models most often held up as exemplary—Toyota’s “lean production” system—today looks decidedly less robust, in the wake of a damaging series of safety-related vehicle recalls.

As shadows fall across formerly peerless exemplars such as Toyota, a slowdown in orders has given many manufacturers a chance for reflection. In the process, a new interest in in-sourcing is emerging as companies question where best to deploy their resources.

“Companies dedicate resources where they get the best return and in a growing market that means investing in increasing capacity,” says Professor Cordón of IMD business school. “But when growth is not there, some are looking at the opportunity to increase profits by bringing certain activities back in-house and doing them better than a supplier because they are more specialised.”

The trend is not universal. Business partnerships—whether with local companies or those in overseas markets—are on the rise. In our survey, more than one-half of respondents would look for new partnerships with low-cost suppliers as a means of improving their cash position, and more than one-quarter have stepped up their offshoring or outsourcing.

Nevertheless, complex global outsourcing networks are no longer seen universally as the key to success. Almost one-half of respondents to our survey are looking to shorten or simplify their supply chains, and one-fifth say that convenient location influenced their decision-making when selecting another organisation with which to collaborate.

Transport costs also play a role in the trend towards in-sourcing or near-sourcing. More than two-fifths of respondents to our survey aim to reduce their energy consumption in the coming year—the

Challenging the old ways

Key points

n Triedandtestedmanufacturingmodelsaregivingwaytogreaterin-sourcingandlesscomplexsupplychains.

n Meanwhile,manyformersupplycountriesarethemselvesbecomingincreasinglyimportantcustomers.

n Somemanufacturersareaggressivelypursuingnewretailmarketsastheyseeknewchannelsforgrowth.

Over the next 12 months, what change does your organisation expect to the following aspects of your business? (% respondents)

Deterioration

No change

Improvement

Energy costs Transport costsOpportunities for industrysector expansion

Opportunities forgeographic expansion

51

35

12

24

31

42

53

35

8

20

34

43



third most popular option for improving cash positions. Falling currencies in some markets, and rising labour costs in countries such as China and India, have also contributed to shifts in global sourcing patterns.

“It hasn’t hit that inflexion point where China is becoming too expensive,” says Mr Zinser of BCG. “But I see a lot more [US] organisations thinking about near-shore opportunities such as Mexico that are more valuable, lower-risk, closer to consumers and now not that much more expensive.”

Meanwhile, as countries such as China and India continue to grow rapidly, companies are beginning to look at emerging markets not only as suppliers but also as customers. Our survey shows evidence that manufacturers have been seeking new markets. While 17% pulled out of less profitable geographical markets, 30% moved into new ones during the downturn.

ATI has been increasing the sales volume of its products overseas, including to the markets of the BRIC countries (Brazil, Russia, India and China). “We have speciality metals for which the technology needed to make them is not in place in China, India or Brazil,” says Mr Hassey. “So in targeted segments, we provide those economies with materials that they don’t produce domestically.”

For some companies, the move away from global outsourcing has been a matter of necessity—many suppliers went out of business during the downturn. For others, however, a rethinking of value chains has led them to recognise the benefits of manufacturing certain products themselves. “It’s almost a soul searching,” says Professor Cordón. “Companies are questioning everything—the fact that they took for granted the growth over the past few years, and recognise that they need to redefine themselves.”

As part of this, companies such as Apple, Sony, Lego and Nestlé (through its Nespresso clubs and boutiques) are even becoming more aggressive retailers through stores that once served primarily as branding vehicles. “Initially, this was a way to provide advertising and promotion,” says Professor Cordón. “But they discovered that many of these shops had become interesting as channels for growth.”

Joining forcesThe manufacturers we surveyed have a good opinion of their abilities to innovate—more than two-fifths say that they regularly set the benchmark for innovation in their industries. However, there is always room for improvement, and while nearly 90% of respondents to our survey say that they intend to boost their innovation capabilities in products and/or service provision over the next 12 months, getting there may not be so easy. Manufacturers refer to a raft of obstacles to effective innovation, chiefly cost barriers (53%), uncertainty about customer demand (39%) and a shortage of appropriate in-house skills (38%).

To overcome the last two of those obstacles, manufacturers indicate that they are prepared to take some big steps. While they appear to be less keen on collaboration with suppliers or partner companies in the year ahead, our survey indicates that manufacturers have a greater appetite for less conventional forms of collaboration—with large corporations, with personal consumers and even with competitors. Favoured partners will be financially stable, skilled-up and with a track record in innovation, but manufacturers are overwhelmingly looking for partners who will give them



access to new technologies, new markets, specialist skills and more efficient product development, ahead of simply helping to keep costs down.

Meanwhile, open innovation—in which companies work with partner firms to leverage ideas, rather than keep them all in-house—appears popular with manufacturers, to the extent that one-third of respondents to our survey are now actively engaged in it.

More firms Fewer firms

What are the primary drivers for collaborating/partnering with more/fewer firms in the year ahead? Select all that apply. (% respondents)

58Cost reduction

57Access to new technologies

57Access to new customers/markets

45Access to specialist skills

27To enable us to focus on our core business

53Increase speed of product development

21Spreading risk across multiple partners

25Being driven to do this by key suppliers/customers

62

12

12

15

31

15

12

31



Shifting gear: A case study of AUMA

AUMA, a German manufacturing company, knows a thing or two about how to keep things moving. It is in the business of manufacturing valve actuators and gearboxes that are used in process plants, in sectors as wide-ranging as water, oil, and military shipbuilding. The firm opened for business in 1964, and more than four decades later it employs 1,700 people worldwide and has a turnover of around €340m.

But AUMA did not escape the downturn, most notably in the area of workforce management. The family-owned company’s biggest challenge has been to reduce its workforce while maintaining productivity within the confines of Germany’s 35-hour working week, according to Matthias Dinse, the company’s managing director. In part, this has been achieved by keeping things in-house: AUMA has retained core staff while axing those supplied by external labour agencies. The rationale is that by investing in training and education of in-house employees, experience is more likely to stay within the company. Creating value through efficiency drives, however, is not new to AUMA. “This is not a one-off as a result of the recession,” says Mr Dinse. “We are constantly analysing and assessing our business processes to see where we can make improvements.”

Indeed, German manufacturing firms are globally renowned for their efficiency, which Mr Dinse attributes to two main factors. First, Germany’s education system continues to provide skilled workers. Second, over the past ten years German manufacturers have invested heavily in scientific research to acquire knowledge of their business, while simultaneously using specialised management consultants to implement changes necessary.

But Frank Krause, director of competence at Staufen, a lean consulting firm, is keen not to “amplify the cliché” that German companies are more efficient. “Germany has been hit by the recession just like every country,” he says. While it may be true that German companies have successfully acquired knowledge, it is important to distinguish between having this knowledge and the ability to implement it competently. “This is a fundamental

distinction and one which many companies deviate from,” he says. AUMA, it would appear, has understood the distinction and

has taken some steps to eliminate aspects of the business that detract from the creation of value, including excess transportation, overproduction and using more inventory than is necessary to complete a project. Mr Krause warns that companies that fail to evaluate their business and then take steps to address unnecessary waste are unlikely to survive in the current climate.

As a result of research instigated by Staufen, AUMA has moved from using a conveyor assembly to what is known as a one-piece flow process or concept. This means that instead of building five units simultaneously, it now completes one and only then moves on to the next. The outcome is that it takes 30 rather than 50 minutes to manufacture a single unit, thus eliminating costly waste. Another focus for AUMA has been to make information technology (IT) an integral, more efficient part of the business. From the time of their initial enquiry, customers can have their product in their hands in six weeks; ten years ago, they would have had to wait four months.

While AUMA continues to manufacture the core modules of its products in Germany, the recession has led to assembly and modification taking place in wholly owned subsidiaries in different parts of the world. “This way we maximise efficiency without compromising quality,” explains Mr Dinse. Because AUMA produces just 80,000 to 100,000 units a year, it made sense to keep the manufacture of the core components at home, thus ensuring quality of materials and suppliers. However, rising import costs, varied industrial standards and increasing demands for local content production in international markets could be addressed by assembling and modifying the product in the local market.

The upside of this is that AUMA now has a better understanding of the requirements of its international markets, knowledge it hopes to put to good use in plans for future expansion into Russia, eastern Europe, Asia and South America. Mr Dinse describes the company’s moves to add value by driving efficiency as a “cascade”. “We initiate certain things at home and then transfer what we have learned to different countries—always taking into account the different mentalities and levels of education,” he says.



Green incentives

As the environmental agenda gains momentum, leading manufacturers are becoming more focused on making greener products or reducing the environmental impact of their existing portfolio

of products. Companies doing so range from UOP, part of Honeywell, which has been developing a green jet fuel from sustainable feedstocks such as animal fat, algae and camelina, to consumer goods companies such as Marks & Spencer, whose “Greener Living” product line includes clothes made of organic cotton or recycled polyester.

Our survey reveals that many companies are rethinking their product lines to meet demand for eco-products. More than two-thirds of manufacturers (67%) say they have already embarked on developing products or services for the green market, or that they plan to, with this figure rising to 88% among companies in the electrical equipment and appliances sector.

Moreover, as manufacturers become increasingly involved in developing their services business, there is a further extension of this model—the leasing business, whereby the whole relationship of the customer to a product changes from owner to temporary custodian. The environmental agenda is another driver, prompting companies to espouse life-cycle assessments of the impact of their products, and cradle-to-cradle approaches, whereby components of a product are recycled and returned to the value chain.

This agenda is partly shaped by political forces. In Europe, legislation is supporting a life-cycle approach to a product’s environmental impact, with Waste Electrical and Electronic Equipment (WEEE) regulations requiring producers and retailers to retrieve and recycle their products at the end of their lives. The WEEE legislation, which covers a wide range of products—from refrigerators, lighting and electronic toys to computers and mobile phones—also allows for the rates of recycling to be increased over time.

Similar legislation exists for the automotive industry under the EU’s end-of-life vehicles directive, which promotes recycling of car components. Meanwhile, manufacturers are required to restrict the use of substances, such as lead, cadmium, mercury and hexavalent chromium, in electrical and electronic goods under the EU’s Restriction of Hazardous Substances Directive (RoHS).

Pressure to recycle products and make them less toxic will, in turn, also drive manufacturers to look much further back in the supply chain. Sometimes, product improvements ride on the back of

Key points

n Moreandmorecompaniesaredevelopingproductsforthegreenmarket,ormakingtheirprocessesmoreeco-friendly.

n Insomecasesthismoveisdrivenbyconsumerdemand;inothersbyregulatorypressure.

n Manufacturersarebeginningtodemandgreenerprocessesalongtheirsupplychains.



the environmental agenda. When SC Johnson, a US family-owned cleaning products manufacturer, reformulated its Windex cleaner, reducing the amount of volatile organic compounds (which vapourise into air pollutants) in the product, it also boosted the product’s cleaning power by 30%.

Manufacturers are also going back to the design stage of their products to seek ways of making them easier to unpick at the end of their lives. This includes using a less complex range of materials and deploying fixtures moulded into the product that allow the parts to snap together, reducing the need for screws or bolts. The Think chair, designed and manufactured by Michigan-based Steelcase, is one of its most popular office furniture products. More than 40% of the chair is made from recycled materials, while 99% of it (by weight) is recyclable. It takes five minutes to disassemble the chair for recycling, using simple tools such as screwdrivers and hammers.

“The whole environmental agenda—either as directives or consumer pressure—will drive manufacturers to repair and remanufacture products rather than manufacture from virgin materials,” notes Mr Buckley of the Manufacturing Institute.

We have already done so

Yes, we plan to

Yes, we plan to, but not in the next 12 months

No, we have no plans

36

32

9

22

2Don’t know/Not applicable

39

Will your business develop new products/services over the next 12 months to specifically target the “green” or “eco” market? (% respondents)



Companies are starting to see themselves as “solutions providers” rather than manufacturers. This represents a significant shift away from old manufacturing models and requires companies to move

into new areas, whether that means increasing the proportion of revenue they derive from services, rethinking their product line to include more high-value goods or becoming managers of the data generated by increasingly technologically sophisticated products.

Moreover, for many companies, high-value manufacturing now includes products that incorporate environmental sustainability into their design, materials and production processes. While leading companies have been pursuing “green manufacturing” strategies for some time, they will come under increasing pressure to bring environmental considerations into their product lines as consumers push for more eco-products and climate change moves up the political agenda.

To make a success of these high-value, service-heavy offerings, manufacturers need to continue to invest in R&D and build up their innovative capabilities. Our survey indicates that this is precisely what many of them are doing.

However, another pressure is on the horizon—the return of tight labour markets, at least for skilled workers. While the workforce imperative faded from view during the downturn, with company lay-offs dominating the agenda, the prospect of ageing workforces in many places, combined with a growing need for skilled employees, means that talent management will become a critical strategy for manufacturers.

The need for talent will only increase as companies embrace value-added business models that demand intensive R&D and a growing emphasis on customisation and services, but for many manufacturers, collaboration and open innovation will offer solutions.

For many companies, the recession has been a period of intensive soul searching, in which long-standing business models have come under scrutiny. Whether the manufacturing sector—one of the hardest hit during the downturn—is on the road to recovery or will continue to face difficult times, savvy companies are recognising that business as usual is no longer an option.

Conclusion

17 © The Economist Intelligence Unit Limited 2010

AppendixSurvey results


Appendix

61

10

7

4

13

6

Good, and we expect the outlook to improve

Good, but we expect the outlook to worsen

Somewhat affected, and expect the outlook to worsen

Badly affected and expect the outlook to worsen

Badly affected but expect the outlook to improve

We do not expect any significant changes

Your business Your sector

54

9

8

4

16

8

Which of the following statements best describes business opportunities in the next 12 months? (% respondents)

48Shorten/simplify supply chain

31Reduce head count and/or cut salaries and benefits

53Seek new partnerships with lower-cost suppliers

43Reduce energy consumption

34Improve access to working capital

27Raise product prices

18Reduce our product range

29Deploy centralised procurement

17Close/mothball manufacturing facilities

13Reduce R&D budget

6Other

Which of the following approaches will your company use to improve its cash position over the next 12 months?Select all that apply. (% respondents)




81

38

26

5

4

Existing cash-flows

Bank loans

Shareholder capital

Government subsidies, eg for innovation

Other forms of credit

What are the primary mechanisms for funding your operations? Select up to two. (% respondents)

What are the primary risks to your business over the next 12 months? Select up to three. (% respondents)

11Lack of access to capital

8Political instability

21Skills shortages

55Rising cost of materials

22Rising cost of transport

32Currency fluctuations

10Protectionist measures

34Downward pressure on our own prices

33Increased competition

23Shrinking markets

3Other

Over the next 12 months, what change does your organisation expect to the following aspects of your business? (% respondents)

Availability of capital

Don’t know/Not applicable

Deterioration

No change

Improvement


Deterioration

No change

Improvement

36

54

7

3

Financing costs Cost of raw materials Energy costs Transport costs

Impact of regulationrelating to carbon

Company share price/valuation

Opportunities forindustry sectorexpansion

Opportunities forgeographic expansion Availability of talent

17

46

23

15

25

48

22

5

45

33

8

14

27

21

51

2

51

35

12

3

24

31

42

3

53

35

8

4

20

34

43

3

35

50

12

4

1� © The Economist Intelligence Unit Limited 2010



Which of the following has your company done over the past 12 months to add value to its business proposition?Select all that apply.(% respondents)

43Addressed operational/IT inefficiencies

49Made changes to management and/or organisational structure

40Invested in R&D for product and/or process innovation

17Exited less profitable geographic markets

23Merged and/or acquired other businesses

43Cut headcount

19Added new high-skilled workers

30Diversified by entering new geographical markets

30Diversified by entering new product markets

26Increased use of outsourcing/offshoring

35Speeded up product development/time to market

23Restructured financing arrangements

22Sought new partners for product or process development

31Invested in emerging markets

3Other

Past 12 months Next 12 months

What percentage of revenue does your organisation invest in R&D? (% respondents)

6None

231.0 %

162.0 %

163.0 %

204-6%

107-10%

9More than 10%

6

17

19

13

25

11

10




91

9

In-house

Outsourced

Where is the majority of your organisation’s R&D investment spent?(% respondents)

Past 12 months Next 12 months

88

12

Crucial

Somewhat important

Neither important nor unimportant

Unimportant

18

39

21

22

39

In your main market of operation, how important has government support been to the survival of firms in your sector? (% respondents)

39

Highly - we regularly set a benchmark for innovation in our market

Somewhat - we occasionally innovate in our market

Not very - we rarely innovate in our market

Not at all - we lag behind our competitors

41

50

8

1

39

How confident are you in your organisation’s ability to develop new innovations and bring them successfully to market? (% respondents)




More

The same

Fewer


34

50

7

9

39

Over the next 12 months, does your organisation intend to collaborate and/or partner with more, fewer, or the same number of other organisations, in comparison with the year prior? (% respondents)

22

More firms Fewer firms

What are the primary drivers for collaborating/partnering with more/fewer firms in the year ahead? Select all that apply. (% respondents)

58Cost reduction

57Access to new technologies

57Access to new customers/markets

45Access to specialist skills

27To enable us to focus on our core business

53Increase speed of product development

21Spreading risk across multiple partners

25Being driven to do this by key suppliers/customers

62

12

12

15

31

15

12

31




54

39

61

14

23

36

2

With which of the following does your company currently collaborate/partner, and with which does it plan to collaborate/partner over the next 12 months? Select all that apply. (% respondents)

Now In the next 12 months

Partner companies (eg, to provide a combined product/service)

Large corporate clients (eg, bespoke product development)

Suppliers (eg, to co-operate on product design)

Competitors (eg, to share resources in the face of competition from a larger company)

Personal consumers (eg, online customer-led product support/feedback)

Technology providers (eg, IT specialists)

Other

49

42

57

19

27

39

3

Which factors are most critical for selecting another organisation with which to collaborate? Select up to three. (% respondents)

18Firms with a similar amount to gain from relationship

19Common cultural fit/open communication

34Financial stability

30Contacts/relationships within a particular market/territory

32Appropriate mix of products and/or services

34Availability of skills

34Ability to innovate

25Shared ethical values/ Common approach to treatment of employees and other stakeholders

21Convenient geographic location


1Other




We intend to improve our innovation for both products and services

We intend to improve our innovation for products only

We intend to improve our innovation for services only

We do not expect any change to our focus on innovation

57

23

7

9

3We expect to decrease our focus on innovation and concentrate onour core products/services

39

Which of the following best describes your company’s focus on innovation in the next 12 months? (% respondents)

57

28

13

10

6

3

33

8

What is your organisation's stance on “open innovation”, in which companies leverage both internal and external sources of ideas rather than trying to develop these entirely in-house? (% respondents)

We do not use open innovation

We have explored the concept but can't see how we might benefit from it

We have explored the concept but it is too difficult/costly for us to adopt

We have applied it in the past without success

We have successfully applied it before but are not doing so currently

We are actively engaged in this

Have never heard of it




53

38

27

28

39

23

20

17

18

14

3

What are the main obstacles to innovating and/or developing new products/services in your company? Select all that apply. (% respondents)

Costs involved

Lack of appropriate in-house skills

Poor management/leadership

Competitive pressures

Uncertainty about customer demand

Poor sales and marketing follow-up

Rapid rate of change in our industry

Poor operational/IT infrastructure

Regulatory constraints

Lack of standards

Other

We have already done so

Yes, we plan to

Yes, we plan to, but not in the next 12 months

No, we have no plans

36

32

9

22


39

Will your business develop new products/services over the next 12 months to specifically target the “green” or “eco” market? (% respondents)




34

59

27

32

20

17

1

Now Next 12 months

In which of the following are you engaged now or expecting to be engaged in over the next 12 months? Select all that apply. (% respondents)

Discrete, top-end manufacturing (electronics, engines, cars etc)

Process manufacturing

Design services

Contract manufacturing

Additional maintenance services

Additional consulting services

Other

29

50

25

27

19

18

1

Public, listed

Private

Public sector organisation

Other

50

48

1

1

Which of the following best describes your company? (% respondents)




27

14

7

3

3

3

3

3

3

2

2

1

1

1

1

1

1

17

3

3

2

US

India

United Kingdom

Denmark

China

Canada

Spain

Malaysia

Japan

Singapore

Italy

Belgium

Brazil

Australia

Ireland

Germany

Sweden

Nigeria

France

Finland

Others

In which country are you personally based? (% respondents)




2

3

7

20

11

11

11

9

6

1

18

What is your primary industry? (% respondents)

Manufacturing: Aerospace and defence

Manufacturing: Apparel and textiles

Manufacturing: Food and beverages

Manufacturing: Chemicals, metals, paper and plastics

Manufacturing: Information and communications technology

Manufacturing: Electrical equipment and appliances

Manufacturing: Instruments and machinery

Manufacturing: Motor vehicles and related

Manufacturing: Healthcare and pharmaceutical goods

Manufacturing: Rail, ships and transport equipment

Other manufacturing

$500m or less

$500m to $1bn

$1bn to $5bn

$5bn to $10bn

35

20

16

12

16$10bn or more

What are your company's annual global revenues in US dollars? (% respondents)




3

16

7

6

22

11

5

8

18

4

Board member

CEO/President/Managing director

CFO/Treasurer/Comptroller

CIO/Technology director

Other C-level executive

SVP/VP/Director

Head of business unit

Head of department

Manager

Other

What is your title? (% respondents)

3

5

19

33

11

20

22

3

6

9

2

13

41

23

5

What are your main functional roles? Choose up to three. (% respondents)

Sustainability and/or environment

Customer service

Finance

General management

Human resources

Information and research

IT

Legal

Marketing and sales

Operations and production

Procurement

Risk

R&D

Supply-chain management

Strategy and business development

2� © The Economist Intelligence Unit Limited 2010



31

3

30

1

29

6

In which region are you personally based? (% respondents)

Asia-Pacific

Latin America

North America

Eastern Europe

Western Europe

Middle East and Africa

While every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsors of this report can accept any responsibility or liability for reliance by any person on this briefing paper or any of the information, opinions or conclusions set out in this briefing paper.

Cover image - © Christian Delbert/Shutterstock

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